Unity University

Adama Campus

Ethiopian Corporate Governance and

stakeholder management practices

Group members ID
1- Mekdim Kassa………………………..MBA/0388/14
2- Telku Nigussie……………………......MBA/0455/14
3- Tewodros Shimeles………………… ...MBA0394/14
4- Tinebeb Gezahegn………………….. ..MBA/0383/14
5- Woldeamanuel Tesfaye…………….. ..MBA/0452/14

Submitted to: Milkiyas A(PhD)

March, 2022

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 Abstract

One of the most important functions good corporate governance is ensuring the quality of
the financial reporting process ,pillar of the market economy and it enhances investor
confidence. A strong and balanced board of directors is necessary to a supervising body for
the executive management of a company with dispersed ownership. The Ethiopian company
law does not have adequate legislative provisions on governance issues related to the
separation of supervision and management responsibilities, and on the composition,
independence and remuneration of the board of directors in share companies. Besides, the
draft Commercial Code has not yet been finalized. This article critically examines Ethiopia’s
company law with specific reference to the powers, composition and remuneration of board
of directors in light of internationally recognized best practices and principles of corporate
governance. It argues that there is a need to distinguish between corporate governance and
corporate management in Ethiopian company law, and that the board should be suitably
composed of non-executive and truly independent members who should be professionally
competent. Furthermore, directors’ remuneration should be incentive-oriented based on
company and individual best performance, subject to the caveat against excessive amounts of
remuneration that go beyond the achievement of this purpose.

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Contents
Abstract................................................................................................................................................2
Introduction.........................................................................................................................................4
Background of the study....................................................................................................................4
Literature Review................................................................................................................................6
Corporate Governance and Practices of Private Banks in Ethiopia................................................7
Corporate Governance in Ethiopia....................................................................................................7
Corporate Governance directive of the NBE.....................................................................................9
Performance of private banks in Ethiopia.......................................................................................10
Developments in the Financial Sector..............................................................................................11
Branch Outreach...............................................................................................................................11
Expansion of Capital.........................................................................................................................11
Resource Mobilization.......................................................................................................................11
New Lending Activities.....................................................................................................................11
Developments in Interbank Financial Markets...............................................................................12
Conclusion..........................................................................................................................................13
REFERENCES..................................................................................................................................14

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 Introduction

Background of the study

Corporate governance issue nowadays has become one of the critical subject matters that get
due attention among governments, scholars and general public as problems emanated from
fraud activities, failure and bankruptcy are becoming apparent and widely manifested in
today‟s ever complex world (Rezaee 2009). Hearing the news about the collapse of the one-
time giant corporate entities, the recurrent waves of business failures and/or the bail-out
actions taken by governments have been no more a surprise for the general public-even if
disappointing, as most of the corporate companies are established and run from the resources
acquired from individuals and/or corporate investors in one way or another. When we look at
the new century‟s corporate scandals that terribly affected major American firms, such as
Enron, WorldCom and Arthur Andersen, and the resulting loss of confidence of the public on
the stock market led to dramatic declines in share prices and resulted in substantial financial
losses to millions of individual investors and for that both the public and experts have
identified failed corporate governance as a principal cause for the scandals (Fernando, 1997).
Furthermore, many researchers have also found that the recent global financial crisis is
mostly attributed to failures in corporate governance such as oversights, failure of risk
analysis and unfair compensation (David, Mingyi, and Pedro, 2009) On top of that the very
recent manifestations on the collapse of such large corporate entities and financial institutions
around the World have left people and concerned bodies to feel that the system for regulation
was not satisfactory, and provoked the need for making appropriate rules of conduct and
practices with substantial external regulations and controls (Fernando, 2006). So nowadays in
business policy and practice, corporate governance is widely accepted as an essential
discipline. Leading international agencies such as the G20, OECD, IMF and WB have
seized upon higher standards of corporate governance not only as the means of managing the
risk of corporate failure but also as a route to improving economic performance, facilitating
access to capital, decreasing market volatility and enhancing of the overall investment
climate (OECD, 2004). Even if corporate governance is considered to have significant
implications for the growth of an economy, regarded as important means in reducing
potential risks for investors, attracting investment capital and improving the performances of

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companies, however, the way in which the system of corporate governance is run differs
among countries depending on the economic, political and social situations that exist in the
respective countries. When we look at the situation in Ethiopia, following the mushrooming
of activities to establish corporate businesses, it was constantly heard about the occurrences
of some malpractices possibly emanated due to the gap seen on the commercial code of the
country which is inconclusive, not go with the contemporary business complexities and
exacerbated with the absence of institutional set-ups needed to enforce them (Hussein, 2012).
According to Minga (2008), the Commercial Code of the 1960 does not provide adequate
legislative response to the complex governance issues of the time. So contrary to this fact,
considering the susceptibility of the sector and the potential problems that could crop-up
either from the financial industry of the country or from other parts of the world, the National
Bank of Ethiopia (NBE) took a solitary action in the promulgation of a corporate governance
law for banks in 2015 for the stricter implementation by all private financial institutions in
the country (NBE, 2015) in view of addressing the under listed major purposes.
 To maintain the safety and soundness of financial system in general and the respective
institutions (sectors) under its supervision in particular;
 To give way to balanced risk taking and enhance business prudence, prosperity and
corporate accountability with ultimate objective of realizing long term shareholders
value and other stakeholders interest; and
 To ensure whether banks are soundly and prudently managed and directed;

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 Literature Review
Corporate governance is not easy to define, as a result of the perpetually expanding
boundaries of the subject (Roche 2005). Definitions vary according to the context and the
cultural situations (Armstrong & Sweeney 2002) and perspectives of different researchers.
Some schools of researchers argue that a firm‟s responsibility is primarily towards
maximizing the wealth of the shareholders (Friedman 1970; Sundaram & Inkpen 2004),
whereas other schools argue that a firm has an obligation, not only to its shareholders, but to
all stakeholders whose contribution is necessary for the success of the firm (Donaldson 1983;
Freeman 1984). The OECD paper defines corporate governance as a system by which
business corporations are directed and controlled. The corporate governance structures
specify the distribution of rights and responsibilities among different participants in the
corporation, such as the board, managers, shareholders and other stakeholders, and spells out
the rules and procedures for making decisions on corporate affairs. By doing this, it provides
the structure through which company‟s objectives are set, and the means of attaining those
objectives and monitoring of performances (OECD 1999). The Basel Committee on Banking
Supervision also used this definition of corporate governance (Basel, 2014).

Literature on corporate governance in Africa is just emerging. While scholars in the

developed economies have developed a large body of literature on the subject, that on Africa
is still very thin. The Dearth of literature is partly due to the fact that the separation of
management and ownership of modern corporations is a fairly recent development in large
segments of Africa, as most economies were dominated by SOEs whose ownership and
management structures derived from a single source-government (UN-ECA, 2007). Even if
the issue of corporate governance is not well advanced in developing countries yet, nowadays
it has however, attracted a great deal of public and government attention because of its
importance to the economic health of companies and its effect on society in general (Rezaee
2009). Since it has significant implications for the growth and prospects of an economy,
numerous recent corporate failures around the world have alerted regulators the importance
of sound corporate governance for efficient operations of capital markets, in reducing risk for
investors, attract investment capital and improve corporate performance (Rezaee 2009).
Regarding the concepts and issues raised in governance, it is very broad. Corporate
governance, however, is specific to business practices in private and public institutions.
Although in the literature the discussion seems to center on the relationships that develop
within a firm, it also encompasses the relationship created between the corporation with its

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shareholders, the workforce and the society at large. Corporate governance also encompasses
the setting of an appropriate legal, economic and institutional environment that allows
companies to pursue long-term shareholder value and maximum human-centred
development, while remaining conscious of their other responsibilities to stakeholders, the
environment and society in general (Akinboade and Okeahalam 2003). Hence in light of such
general and specific concepts on corporate governance practices; the current chapter is
organized to validate the researchable problem of this study. The various 8 definitions given
for corporate governance from different perspectives, contextual and theoretical backgrounds,
the governance mechanisms such as board structure and corporate reporting, corporate
performance and other pertinent concepts which have significance for the conceptual
framework development of this study are also addressed in this chapter.

Corporate Governance and Practices of Private Banks in

Ethiopia

Corporate Governance in Ethiopia

The existence of good corporate governance is one of the pillars for the existence of an
efficient market in the economy and also possibly shall raise the confidence of both local and
international investors, especially for counties like Ethiopia where availability of capital for
investment activities is scant. On top of that it has also becomes the order of the day to have
an effective governance system together with an efficient and organized institutional set-ups
in order to be competent in the global financial resource acquisition both at county level in
general and/or corporate level in particular. It is also known that developing countries
somehow rely on foreign investment and trade for economic growth. The top criteria used by
international investors in evaluating the investment potential include the legal and accounting
infrastructure, fraud risk and corporate governance of a given country. Therefore, to build -
investors confidence developing countries need to undertake reforms of corporate
governance, financial reporting and related laws (Abhayawansa & Johnson 2007). However;
when we look at the existing Ethiopian commercial law (even if it is under revision),
according to Hussien (2012) it is neither go with the time and complexities of the economic
activities and interdependencies that the current global business atmosphere demands, nor

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contain acts, legislative provisions and mechanisms related to governance issues especially
when we look at it in light of internationally recognized best practices, principles and
mechanisms of corporate governance. As (Hussien, 2012) described, even if the Commercial
Code of Ethiopia incorporates provisions pertinent to the governance of share companies,
however, such provisions are inadequate to address specific issues of corporate governance
related with board of directors such as on the separate roles of non-executive directors and
CEOs, on the composition and independence of 26 boards as well as remuneration of
directors. In addition, even the definition of „corporate governance‟ is not provided in the
Ethiopian company law (Ibid). Even if the gap in the commercial code is known and the
process of revising the existing commercial code is under process, currently there are a
number of companies that are being established through the sales of shares to the wider
public (Addis Fortune, 2011). Hence the emergence of publicly held share companies in
Ethiopia gave rise to a multitude of issues on corporate governance (Tewodros, 2011)
typically related to agency problem where agents (managers) may misappropriate the
principals‟ (shareholders‟) investments and there also exist block-holders so that minority
shareholders could be exploited. The agency problems that could occur between dispersed
shareholders and managers and/or block-holders of share companies in Ethiopia, therefore,
necessitate the need for good corporate governance laws and institutions. Issues related to the
existing gap was also raised and addressed in many literatures by academicians and others
(Minga, 2008, Fekadu, 2010, Gabor and Zekrie 2009). According to (Hussien, 2012) there
were attempts made and studies conducted to introduce a voluntary code of corporate
governance by the Addis Ababa and Ethiopia Chamber of Commerce and Sectorial
Associations in collaboration with the Government of Ethiopia through the support of the
Swedish International Development Agency (SIDA), to launch an ambitious private sector
led initiative (a voluntary code of corporate governance) so as to institutionalize corporate
governance in Ethiopia in 2011(Gabor and Zekrie, 2009).
1.1. Corporate Governance of Financial Sectors in Ethiopia
Publicly held companies are referred to as “share companies” in Ethiopia‟s Commercial
Code. Even though all companies (including financial institutions) have to adhere to the
provisions of the commercial code to operate in the country, financial institutions are also
expected to comply with proclamations , policies and subsidiary directives exclusively issued
by the NBE (Hussien, 2012).

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 Corporate Governance directive of the NBE

As stated in the previous chapters, the establishment of publicly held companies in Ethiopia
has been soaring from time to time, even if the existing corporate law of the country could
not be able to address and provide solution to all the contemporary problems investors has
been facing in connection with the establishment and running of such business entities. For
that, it has been long heard that the process of revising the existing commercial law of the
country has been underway. However taking various local and international developments in
to account, the critical roles financial institutions play in the economy of the country, the
recent global financial crisis & the profound adverse effects it posed on the global economic
performance, as a requirement to be fulfilled to work with the rest of the world and to
safeguard the interests of the stakeholders and investors in the financial sector, the
supervisory organ of financial institutions of the country, the NBE, had taken the initiative to
declare a policy for corporate governance for banks (SBB/62/2015 and now first replacement
(SBB/71/2019) due to the absence of an all-inclusive corporate governance provision in the
commercial code of the country. As stated in the governance policy, the following are the
main reasons for having the policy:
1) Sound corporate governance plays a vital role in maintaining the safety and soundness of
financial system in general and banking/insurance/microfinance sector in particular;
2) Corporate governance gives way to balanced risk taking and enhances business prudence,
prosperity and corporate accountability with ultimate objective of realizing long term
shareholders value and other stakeholders interest;
3) To ensure whether banks/insurers/microfinance institutions are soundly and prudently
managed and directed; Accordingly, share companies engaged in the banking sector have to
comply with the Banking Business Proclamation No.592/2008 and all the directives and
procedures issued by the National Bank of Ethiopia (NBE), one of which is the Corporate
Governance for banks directive No SBB/71/2019 that came in to force effective 2019, which
is the main issue and center of analysis of this paper. The following are the major points
extracted from the corporate governance policy for banks that are found relevant for the
purpose of this paper.
1) Article 5, states about the size and composition of the board members where;
i. Sub article 5.1 states that the bank’s board should At least have Nine directors,

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 ii. Sub article 5.2 states about the board may preferable comprise of directives who as a
group provide mixture of core competencies such as banking, finance ,accounting
management and economics.
iii. Sub article 5.3 states about the board shall comprise of female directive provided that
eligible candidate are available among shareholder.
iv. Sub articles 5.4 states about the composition of non-influential (minority) shareholders
and the board should comprise of non-influential shareholders whose number shall not be less
than:
A. One-third (1/3rd) of the total board members elected separately by the non-influential
shareholders provided such shareholders hold at least 30% and above of the subscribed
B. One-fourth (1/4th) of the total board members elected separately by the non-influential
shareholders provided such shareholders hold less than 30% of the subscribed capital of the
bank,
2) Article 6 General meeting of shareholders and sub article 6.1 under sub article 6.1.3 states
that the ordinary meeting of a bank shall ensure that the board is held accountable and
responsible for the inefficient and ineffective governance.
3) Article 7, Representing and voting b proxy.
4) Article 8 states that the Nomination and election committee
5) Article 10, sub article 10.1 is about appointment of directors and states that it is subject to
approval by the National Bank of Ethiopia, i. Article 10, sub article 10.4 states in detail about
the responsibilities of board of banks, of which sub article 10.4.10 puts that the board should
establish and also ensure the effective function of board sub-committees including, but not
limited to, Audit Committee, Risk and Compliance Committee and Human Resource Affairs
Committee.
6) Article 11, Responsibilities of Chief executive officer

Performance of private banks in Ethiopia

According to the annual report made by the NBE for the year 2020/21, major economic
indicators show that Ethiopia has recorded a rapid growth where industry grew by 29.3
percent, services by 29.0 percent and agriculture 39.6 percent. Their contribution to the
annual growth was 7.3 percent, 6.3 percent and 5.6 percent respectively (NBE, 2020/21).

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 Developments in the Financial Sector
Banks, insurance companies and microfinance institutions are the major financial institutions
operating in Ethiopia. The number of banks stood at 22 of which 20 were private and the
remaining Two are state-owned.

Branch Outreach
With respect to financial sector performance, Ethiopia has made progress. Commercial banks
opened 833 (of which 459 were private) new branches which increased the total numbers of
branches to 7,344 up from 6,511 a year ago as a result bank branch Outreach in 2020/21.
Despite aggressive branch expansion by public banks, their share in total branches slightly
went up to 73.44 percent from 65.11 percent last year and about 40.6 percent of bank
branches are found in Addis Ababa during the fiscal year under review.

Expansion of Capital
The total capital of the banking industry increased by 38.0 percent and reached Birr 60.5
billion by the end of June 2020 as the result of a number of banks injected more capital. For
that, the share of private banks in total capital marginally increased to 56.5 percent from 55.4
percent last year, while that of CBE remained at 34.0 percent.

Resource Mobilization
Commercial banks on their part have stepped up their deposit mobilization which saw a 25.5
percent annual growth. Their loan collection exhibited a 16.0 percent increase and new loan
disbursement was expanded by about 26 percent. Of the total loan disbursement, about 68
percent went to finance private sector. Moreover all indicators showed that commercial banks
were well capitalized and their return on equity and assets were above the required level, and
their non-performing loans were kept within the prudential requirement (Ibid). The rise in
saving deposits indicates the steady growth in financial intermediation of banks. The share of
private banks in deposit mobilization increased only marginally to 32.2 percent from 31.5
percent last year despite their opening of 359 new branches. CBE alone mobilized 66.1
percent of the total deposits which is largely due to its branch network.

New Lending Activities

Commercial Banks and DBE disbursed Birr 75.5 billion new loans to various economic
sectors during the review fiscal year witnessing a 25.9 percent annual increase in line with

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higher deposit mobilization and collection of loans. Of the total new loans disbursed, about
44.5 percent was by private banks, and the rest by public banks. 3.4.1.5 Sectorial Distribution
of Loans Sectorial distribution of outstanding loans (excluding central government) indicated
that credit to industry accounted for 39.7 percent followed by international trade (19.9
percent), domestic trade (11.7 percent), housing and construction (10.4 percent) and
agriculture (8.5 percent). The share of private sector including cooperatives in outstanding
credit stood at Birr 147.4 billion or 67.9 percent reflecting a 28.7 percent growth over last
year.

Developments in Interbank Financial Markets

Although there is no secondary market in Ethiopia, government bonds are occasionally issued
to finance government expenditures and/or to absorb excess liquidity in the banking system.
A) Treasury Bills Market the transaction in the Treasury-bills market on weekly basis
constituted throughout the fiscal year. At the end of 2020/21, the total outstanding T-bills
stood at Birr 41.7 billion, 29.0 percent up from a year ago. The banks‟ participation in the T-
bill market showed not a marked improvement and the dominance of non-bank institutions
continued in the review year. Accordingly, the non-bank institutions account for the entire
amount of the total outstanding Tbills. B) NBE Bill Market NBE-Bill was introduced in April
4, 2011 so as to mobilize resources from commercial banks to finance priority sectors
identified by the government as key for long-term growth of the economy. Since their
introduction until end of June 2015, NBE bills to the tune of Birr 37.4 billion were sold to the
banking sector. 32 C) Inter-Bank Money Market The interbank money market remained
inactive in Ethiopia due to the existence of excess reserves in the banking system.
Accordingly, no inter-bank money since its introduction in September 1998; merely twenty
three transactions worth Birr 259.2 million were transacted with interest rates ranging
between 7 to 11 percent per year. The maturity period of these loans widely spanned from
overnight to 5 years. From the above information we can observe how the cumulative
performances and roles of the private commercial banks constitute key part in the overall
economic activities and development of the county. Not only the employment opportunities
created along with the expansion of branches throughout the country, their contribution to the
government coffer in the form of profit and income tax and the significant role they are
playing both in the social and economic activities of the county and the voluntary
participation to discharge their corporate social responsibilities are also something worth
mentioning.

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 Conclusion
As explained in the introductory chapter of this study, it has been found that the prevalence
and active engagements in the implementation of corporate governance practices in full will
have multifaceted advantages. Such as the uplifting of both local and international investors‟
confidence in a given country and smoothens the inflows of low cost capital resources to
developing countries like Ethiopia where such resources are scanty. On the other hand, being
found indifferent to such facts and on conditions that a country doesn’t have the policy that
enforce governance practices, the potential damages possibly emanated from malpractices are
obvious, as can easily be witnessed from the global economic turndown following the 2009
financial crises where the impacts the crisis had left on the global economy has not yet
resolved convincingly. As stated earlier the main cause of the problem was emanated from
the lack of proper governance of the financial institutions, existence of board oversights, lack
of the proper implementation of controlling and monitoring organizational activities and the
unethical tone created at the top are a few of the reasons to mention, which all are related
with the issue of corporate governance. Taking such global facts and the occurrence of
possible incidents having similar nature along with the absence of the appropriate corporate
governance policy for both financial and nonfinancial institution in Ethiopia in to account, the
NBE had put in place the corporate governance above 68 policy for banks for a strict
execution in 2019 by all the concerned parties, including the private commercial banks.

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 REFERENCES

NBE, Licensing and Supervision of Banking /Insurance/Micro-financing Business, Bank

Corporate Governance Directives No SBB/62/2019,
Tewodros Meheret (2011), Governance of Share Companies in Ethiopia, in Seyoum
Yohannes eds., Starting and Building a Business Association in Ethiopia: The Legal and
Institutional Dimensions”, Ethiopian Business Law Series, Vol. IV, AAU, School of Law,
(August 2011),
Yohanis Tessema (2016), Corporate Governance Policy and Its Effects on the Performance of
Private Banks in Ethiopia - A Comparative Analysis, Addis Ababa university.

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